It’s October and markets are falling hard. Usually I’d start by discussing how stocks are tanking, but what’s even more concerning is that it’s global bond markets that are selling off!
What makes this situation particularly concerning is that sovereign bonds like US Treasuries are used as “safe,” pristine collateral on bank balance sheets etc. So when these bonds have a big drop in value as rates blow out, trades can unwind fast and bank balance sheets can unravel quickly too.
Back in March this exact scenario took out a number of regional US banks. That’s when interest rates hit 4%, today we’re at nearly 4.8%. To buy time, last March the US Fed created a special bank funding vehicle to help keep banks afloat. Banks could essentially swap their Treasuries for cash to help them through the market turbulence.
The big problem, of course, is that there seems to be no end in sight for this “market turbulence.” Interest rates are at 20 year highs and central banks have signalled higher for longer as inflation isn’t coming down fast enough; debt levels among consumers, businesses and governments are at historic levels; and asset prices are still at very high levels.
Somethings for sure gotta give. People are struggling under massive payment increases for their mortgages, never mind high financing rates for vehicles and everything else. Food and energy costs are still skyrocketing. Bankruptcies here in Canada and around the world are rising.
The TSX has been falling for over a week now and some stocks are sinking to levels last seen during the March 2020 Panic.
Of course, the stalwart dividend stocks that were all the rage last decade are collapsing and many are sporting yields of 6,7 and even 8% …Wow!
These are certainly enticing yields and my hunch is that we’re in for a lot more pain in stocks, bonds and especially real estate here in Canada.
But I am starting to slowly buy in and rebuild my passive dividend income. I may be early, I know, but I think there is sufficient value in many top dividend stocks to warrant some buying. So I’m starting to dollar cost average in. Utilities and pipelines are looking attractive, the telcos of course and some banks like CM and BNS are getting down to interesting levels. My guess is that all Canadian banks will get washed out in the coming months.
I’ve learned that you’ll never time the highs and lows exactly right, but when I see some compelling value it’s worth slowly buying in. Especially if you’re a long term investor and can handle the extreme volatility to come.
Cheers!
Save, Invest, Build Wealth and Prosper
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